Category Archives: Development

Assessing the Determinants of Economic Growth in South East Asia

The Historical State, Local Collective Action, and Economic Development in Vietnam

By Melissa Dell (Harvard University), Nathaniel Lane (Stockholm University), Pablo Querubin (New York University)

Abstract – This study examines how the historical state conditions long-run development, using Vietnam as a laboratory. Northern Vietnam (Dai Viet) was ruled by a strong centralized state in which the village was the fundamental administrative unit. Southern Vietnam was a peripheral tributary of the Khmer (Cambodian) Empire, which followed a patron-client model with weaker, more personalized power relations and no village intermediation. Using a regression discontinuity design across the Dai Viet-Khmer boundary, the study shows that areas historically under a strong state have higher living standards today and better economic outcomes over the past 150 years. Rich historical data document that in villages with a strong historical state, citizens have been better able to organize for public goods and redistribution through civil society and local government. This suggests that the strong historical state crowded in village-level collective action and that these norms persisted long after the original state disappeared.

URL: http://econpapers.repec.org/paper/nbrnberwo/23208.htm

Circulated by nep-his on 2017/03/19

Review by Fernando Arteaga (George Mason University)

What was the impact of the ancient Vietnamese Dai Viet empire in promoting long-term economic development? That is the main question the authors try to assess. Their inquiry is embedded within the now large literature on the importance of culture and institutions, as deep determinants of growth. The contribution the paper makes is, however, not restricted to adding one more piece of evidence in favor of it, but, more importantly, in providing empirical support for a specific transmission channel: how state capacity can be built through time via the fostering of local self-organization capabilities.

The paper’s main story builds on the idea that two distinct meta-societies existed within East Asia, and idea around which, by the way, there is general agreement. One of these societies based on Chinese precepts, prevalent in the Northeastern region; and other spread in the Southeast throughout the Indian Ocean.  Societies of the former category were historically constituted around a sort of Weberian professional bureaucracy that consolidated the working of a central state. The latter depended more on informal networking mechanisms among local elites to survive, and hence, tended to promote hierarchical patriarchal relationships.

Today’s Socialist Republic of Vietnam (henceforth Vietnam) is an interesting case study precisely because it arose out of the union of those two distinct cultures. The northern part, the Dai Viet, is an example of a Sino-style state, while the southern part of Vietnam (initially part of the Champa State and later as part of the larger Khmer Empire) resulted from a Indo-style society.  Figure 1 below offers map of present day Vietnam aligned with the size of the historical Dai Viet empire. Figure 1 suggests the Dai Viet expanded southwards through time but ended up establishing its final frontier in 1698 (orange color). It is this border the authors think provides a natural experiment that allows a clean regression discontinuity (RD) strategy that permits the disentanglement of the effect of being part of a bureaucratized state vis a vis a patriarchal state.

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Figure 1: Dai Viet Historical Boundaries (Dell et al., 2017)

The use of the RD design is appropriate, the authors argue, because the chosen border resulted from exogenous contingencies that do not reflect any difference in future economic potential. The 1698 demarcation was settled on the ridges of a river, but there was nothing else particular to it that made that boundary preferable to other potential borders. The Dai Viet stopped its expansion because of constrains imposed by a local civil war (something that has nothing to do with the river itself). Moreover, the environmental characteristics of both sides of the river are almost identical (or vary smoothly), so there is no important geographical difference either. The only thing that changes abruptly is that on the east shore of the 1698 border, Dai Viet settlers occupied and controlled the land, while Khmer villagers occupied and controlled the land to the west of the river. Another possible counterargument to the use of the 1698 border as a natural experiment is the relevance of migration: if settlers moved across villages (at any time after the establishment of the original border), then the boundary becomes inconsequential. The authors argue that, even though they do not have historical data to control for it, there is qualitative evidence that refers to negative attitudes towards outsiders within the villages, which constitutes an important constraint to any major migratory flow. Today, both sides are part of Vietnam. It is then possible to assess if Die Viet institutions still exert some type of effect in current economic outcomes.

Figure 2 portraits the main outcome of the paper. Using household expenditure data from recent censuses (2002-2012), the authors find that today, villages situated along the historical Die Viet side of the border earn a third more than those communities that are situated on the historical Khmer side (Within the figure, the darker the zone depict lower earnings).

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Figure 2a: Household Consumption, RD Graph (Dell et al., 2017)

The authors, however, not content with establishing the effects on current outcomes, look for historical evidence too. They collect data from different periods of Vietnamese history: 1878-1921 for the French Colonization, 1969-1973 for the South Vietnam State, and 1975-1985 for the early Communist Period; and find that the pattern is persistent through time: The Diet Viet zone is, in general, more developed than the Khmer side.

How can these results be interpreted?  The income differences must be due to the Die Viet heritage of greater state capacity that acted through local community self-organization that made them more co-operative and facilitated the resolution of local collective action problems. To test whether this transmission channel matters, the authors looked for data on social capital. Their main sources were the surveys and census of the South Vietnamese period. What they find corroborates their story: villagers on the Diet Viet side were more prone to participate in community activities, to collect more taxes (that at the time were local responsibility, not provincial), to have greater access to public goods (health, school and law enforcement), to be skeptical of central government in favor of local, and to give more to charity.

Comment

All in all, the authors do a thorough job in assessing the robustness of their main story. They control for several of potential alternative stories and/or possible variables that could affect the results and mechanisms.  Any critique of it may sound redundant or unreachable.  Yet, I would point to three different aspects that may be important.

First, and perhaps most importantly, I would stress that although the argument makes sense, the narrative is unclear as to how specifically the Dai Viet, which supposedly was a centralized bureaucratized state, fostered local governance. As the authors mention in the introduction, the literature on social capital is ambivalent on its effects on economic outcomes. As it is, the paper’s contribution is the finding of empirical evidence on the presence of a particular transmission channel (from state to local governance), but without a clear model and/or an analytical narrative, we are left in the dark about how explicitly this mechanism worked its way throughout society.

Second, and pushing the level of pickiness even further, one can always speak of a potential omitted variable bias. I must ask then: what about genes? The authors minimize ethnic fragmentation as a problem because they find the studied area is cataloged as being almost entirely composed of homogeneously ethnic Vietnamese. The problem is that censuses and surveys may under-report true ethnicity, and cannot capture genetic differences at all. By the authors’ own account, we are told the Diet Viet State originated as, and remained for a long time, Chinese. Moreover, as Tran (1993) attests, Chinese ethnicity may conflate the results of the paper in other several ways:

  • the largest Chinese migration occurred between the late 17th century and early 19th century, just at the time that the Dai Viet-Khmer border was being established;
  • The Chinese settled mostly in southern Vietnam, the part that the authors use as study case;
  • Chinese early importance resided precisely in that they helped establish new villages and trade outposts. They (not merely the Diet Viet heritage) helped to build local governance structures.

If ethnicity has been underreported and/or Chinese genetics matter in fostering economic development in any way (as suggested by Ashraf-Galor, 20013a, 2013b) then the interpretation of the paper could dramatically change: the importance of the Dai Viet state would be downplayed in favor of just being more ethnic/genetic Chinese. After all, it is known that there is a correlation between having larger ethnic Chinese minority and larger economic growth (Priebe and Rudulf, 2015).

Third, related to the last point: one would expect that given the importance of the result – the long-term reach of Diet Viet institutions–, its impact would feel more broadly across all the territory, not only in the immediate zones of the frontier which were the last to be incorporated into the state.  Figure 3, for example, shows the level of poverty in Vietnam (Epprecht-Heinmann,2004). It is visible that the area under study (along the last border of the historical Diet Viet) has the lowest share of poverty in the whole country. The immediate area to the left (which coincides with the area that historically belonged to the Khmer Empire) is poorer indeed. But the differences are minor if we compare them to the rest of current Vietnam, which belonged almost entirely to the Diet Viet, and has the largest poorer areas.  The RD design may be identifying a non-observable variable that is concentrated in the southern part (like ethnicity or/and genes) and is not broadly distributed across the rest of Vietnam.

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Figure 3: Incidence of Poverty in Vietnam (Epprecht-Heinmann, 2004: 155).

Additional References

Ashraf, Q., Galor, O., 2013a. Genetic Diversity and the Origins of Cultural Fragmentation. The American Economic Review: Papers on Proceedings 103, 528–533.

Ashraf, Q., Galor, O., 2013b. The “Out of Africa” Hypothesis, Human Genetic Diversity, and Comparative Economic Development. American Economic Review 103, 1–46.

Epprecht, M., Heinemann, A., 2004. Socioeconomic Atlas of Vietnam: A depiction of the 1999 Population and Housing Census. Swiss National Centre of Competence in Research, Bern.

Priebe, J., Rudolf, R., 2015. Does the Chinese Diaspora Speed Up Growth in Host Countries? World Development 76, 249–262.

Trần, K., 1993. The Ethnic Chinese and Economic Development in Vietnam. Institute of Southeast Asian Studies, Singapore.

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The Limitations of Correcting Data with more Data

Brazilian Export Growth and Divergence in the Tropics during the Nineteenth Century

By Christopher D. Absell and Antonio Tena Junguito (both at Carlos III, Madrid).

Abstract: The objective of this article is to reappraise both the accuracy of the official export statistics and the narrative of Brazilian export growth during the period immediately following independence. We undertake an accuracy test of the official values of Brazilian export statistics and find evidence of considerable under-valuation. Once corrected, during the post-independence decades (1821-50) Brazil’s current exports represented a larger share of its economy and its constant growth is found to be more dynamic than any other period of the nineteenth century. We posit that this dynamism was related to an exogenous institutional shock in the form of British West Indies slave emancipation that afforded Brazil a competitive advantage.

url: http://econpapers.repec.org/paper/ctewhrepe/wp15-03.htm

Distributed by NEP-HIS on: 2015-05-22 and published under the same title in Journal of Latin American Studies (Online, April 2016)

Reviewed by Thales A. Zamberlan Pereira (University of São Paulo)

The best place to find the (rather scarce)  macroeconomic data for 19th century Brazil are the official statistics compiled by the Brazilian Statistics Institute (IBGE). The IBGE data is the main source in Brian Mitchell’s international historical statistics and both are commonly used in the literature exploring Brazilian economic history. The paper by Absell and Tena is an attempt to test the accuracy of these sources by looking at official export statistics between 1821 and 1913. If nothing else this  already makes this an interesting paper.

Paraguay-Guiana-Brazil

The focus in export data relies on the argument that the Brazilian economy remained stagnant during the decades that followed Brazil’s independence until 1850 when there was renewed economic growth. While the more recent literature suggests the development of a domestic economy before 1850, the more “classic” literature focuses on the foreign sector to calculate Brazil’s economic growth in the 19th century.

Absell and Tena confirm previous findings that official export statistics were undervaluing exports after 1850. But their study extends to the earlier period and suggests that official statistics  also had a significant bias for the first half of the 19th century. In particular their analysis suggests that Brazilian export growth before 1850 was much higher than previously assumed and that a change in international demand, especially for coffee, was the principal determinant for this growth. The last section of the paper tries to explain the sources of Brazil’s “dynamic export growth” during the post-independence decades and shows that an increase in foreign demand was much more important than changes in domestic productivity. The high rate of growth in exports between 1821 and 1850, a very interesting result, is calculated by deflating prices using an index from a new series of commodities prices.

Coffee_8

 

Comment

All of Absell and Tena’s results are grounded in the price correction of the official export data and, therefore, the most interesting part of the paper is the reconstruction of Brazil’s export statistics. To correct the official data, they used international prices for the different commodities (mainly cotton, sugar, and coffee) and subtract freight rates, insurance costs, and export taxes. That is, they convert c.i.f. (cost, insurance and freight) values to f.o.b. (free on board) creating new series for these variables. For insurance and freight rates they used trade data between Rio de Janeiro and Antwerp. It should be noted, however, that a large part of cotton exports before 1850 went to Britain, and freight rates between Brazil and Liverpool were half of what they were for freight travelling to Portugal or France.

Absell and Tena argue that official data for exports was sourced in a weekly table organized “by a government committee in consultation with local commodity brokers and commercial associations.” This information was then verified by the Ministry of Finance,  who sent the tables to provincial customs houses (which calculated the tax revenue) and also to major news periodicals. If the official values were organized like this for the whole period under study, as the authors argue, it would be easier to doubt the accuracy of exports statistics. But, it is difficult to understand how a system of weekly information could work in a country the size of Brazil during the 19th century. Before 1850, northern provinces like Maranhão had stronger business relationships with Lisboa and Liverpool than with Rio de Janeiro. Some northern provinces did not support independence in 1822 because of close economic ties with Portugal.

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An additional issue is that many important provinces, even after 1850, did not use the weekly table to calculate their taxes. Evidence suggests that in Minas Gerais and São Paulo, two major coffee exporters, the government used a fixed price system to calculate taxes. See, for example, debates at the provincial assembly of Rio de Janeiro, November 1862, 1879; available online. This information, of course, does not invalidate the argument about the inaccuracy of official values, but it provides some clues that the authors’ correction could have a significant bias as well.

Another problem with the transformation to f.o.b. prices regards export duties. In the working paper version of this article, they assume this “additional trade cost” represented between 1 to 7 per cent of export values. There is extensive evidence, however, that export taxes were a much higher burden throughout the 19th century. Debates at the Chamber of Deputies, the Senate, and in newspapers show that before the fiscal reform in the 1830s, export duties for sugar and cotton could reach more than 20 per cent. The export duties also varied across provinces. After 1850, they continued to be at least 10 per cent.  The export duties presented by Absell and Tena are undervalued because their source from 1821 to 1869 only show the total revenue collected by the central government, not revenue collected by provincial custom-houses. Making assumptions in such calculations is valid, but information regarding data sources should have been more clearly explained in the published version.

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Because the objective of the authors is to correct export values using more accurate price data, it should be clear that they do not use only price for Brazilian commodities to adjust the official statistics. To correct the value of Brazilian cotton exports, for example, they use price information of Guyana Raw (Berbice or Demerara) and Middling Uplands (United States) to the United Kingdom. The figure below shows the price of an arroba of cotton in pennies (d) from four different sources, including two prices series for Brazil not used in Absell and Tena paper. The first is the price from the official statistics (IBGE), the second is the price of cotton at the port of Maranhão, the third is the price of cotton from Maranhão in Liverpool, and the last one in the average price of West Indies in Liverpool. As can be seen,  using prices for Brazilian cotton would change some of the magnitudes that the paper proposes.

this_is_an_excel_graph

In summary the paper by Absell and Tena makes a worthy contribution and it proposes a revisionist approach to an important source. An important problem in the paper, however, is not discussing how its own sources could limit their conclusions, a crucial aspect in any revisionist study.

Neoliberalism: A Cultural Social Construction

Crisis Without End: Neoliberalism in a Globalized Environment

by Richard N. Rambarran (University of Hyderabad)

Abstract: Since the 1970’s, both politically and theoretically, neoliberalism as an ideology has been on a persistent rise to the point where, in the twenty first century, it has garnered hegemonic dominance. Despite several recurring crises in countries since the ascendance of neoliberalism, we yet remain reluctant to point out the political economy philosophy as a root cause of the crises. Instead, many of the academics within Economics prefer to offer bouts of highly technical reasons for the downturn – this is especially true and almost solely applicable to those who practice within the ‘neoclassical’ conjecture of Economics. In a typical Marxian sense, one would have to look no further than the economic system to determine both economic and social outcomes of a country. What dictates that economic system however is the political philosophy of the leaders who guide the economic system – the policy makers. This paper attempts to show the neoliberal political philosophy, as the common thread for major crises within the last two decades. It also proposes a societal trinity for which change is driven through complex interactions among the political, economic and social spheres.

URL: http://EconPapers.repec.org/RePEc:pra:mprapa:67410

Circulated by nep-his on: 2015-10-25

Revised by: Stefano Tijerina

Richard Rambarran joins an emerging group of scholars that are spearheading an aggressive global criticism of modern capitalism, and particularly the impact that neoliberalism has had on its most recent methods of implementation within the international system. Thomas Picketty’s Capitalism in the Twenty-First Century has lead the way in recent times. Nevertheless Rambarran’s contribution to the discussion is welcomed because it points out that the economic political philosophy behind the social construction of neoliberal ideals is the determinant factor in preserving <status quo, even after numerous economic crises.

Richard Rambarran Research Fellow at The Social Economy Research Group (SERG)

From Rambarran’s point of view, the neoliberal principles have become an “ingrained” ideology fomented by economists, local politicians and bureaucrats, domestic and multilateral institutions, academic institutions, mass media, corporations, and the consumer.[1] He further argues that today’s mainstream professional economist has perpetuated this social construction using its mathematical and econometric technical rhetoric to distance itself not only from the public sphere but also from the critical role once played by the “Classical economists.”[2] The complacency in the professional sphere has permeated the public sphere, where the collective political and social conscience is more concerned in pursuing the possibility of “wealth and great opulence,” occasionally reacting to economic crises like the one in 2008 only to quickly return to the initial passive approach once individual financial issues are partially resolved.[3]

Rambarran centers on the 1997 East Asian crisis and the 2008 Global Financial Meltdown in order to illustrate how the economic political philosophy has come to dictate “the very mechanics of our lives” through its systemic and institutional framework. He argues that contrary to the views of many scholars that the rise of neoliberalism came with the emergence of political leaders Ronald Reagan and Margret Thatcher, the foundations of the political philosophy and its social construction emerged in the post Great Depression era.[4] The solutions to the 1997 and 2008 crises therefore represent a series of theoretical models constructed since the first modern global financial crisis in order to scientifically justify the perpetuation of neoliberalism.

'Well what a coincidence! I'm a financial regulator too!'

‘Well what a coincidence! I’m a financial regulator too!’

The ingrained idea that “human well-being and social welfare” are best advanced by the deregulation of the institutions, programs, and norms that once regulated the capitalist machine, seems to be an unquestionable thought. [5] To get to this social reality, argues Rambarran, classic liberal ideas of John Locke, Adam Smith, David Ricardo and the like had to be dismantled in order to neoliberalism to surge. According to Rambarran, neoliberalism is “not simply a minutely revised version of classic liberalism,” it is a new version of capitalism that reduces the role of the state to its minimal.[6] The business-government alliance that pushed neoliberalism forward after the 1930s slowly twisted the idea that “liberating individual and entrepreneurial freedoms and skills” through institutions, programs, and a normative systems “characterized by strong private property rights, free markets, and free trade” were actually responsible for the debacle of the market system in 1997 and 2008, and that greater privatization of services and deregulation for the business sector was the only solution moving forward.[7] These are the principles of nation state building under globalization, the basic political economic structures of nations that welcome open market and free trade, the minimal parameters for participating in the global market system; ideas that, as indicted by Rambarran, are part of the subconscious decision making dynamic between politicians, the private sector, and consumers.[8]

The current realities of this “macroscopic trinity” indicate that the business class, defined by Rambarran as the “intellectual class,” heavily influences political, economic, and social perceptions of nation building under a globalized system.[9] An intellectual class responsible for the cultural social construction of neoliberal principles that originated in the industrial world during the first half of the twentieth century and that began to spread across the developing world after the Second World War.

Macroscopic TrinityNeoliberal economists obsessed with breaking the chains of state regulatory systems and interested in returning to the deregulated conditions of the pre Great Depression era used theoretical models to debunk Keynesian economics.[10] During the 1970s and 1980s neoliberal principles became the formula for stagflation in the highly developed countries, and the remedy for the increasing external debt crisis across the developing world. The effective release of the forces of the market justified the dismantling of the social welfare state and the institutional and programmatic bodies that awarded citizens levels of accountability within the triangular dynamic of government-business-constituent relationships across the world. Nationalist development models based on Import Substitution Industrialization were dismantled and replaced by the principles of deregulation, privatization, and the strengthening of private property rights.

According to Rambarran, the implementation of the neoliberal experiment across the world produced mixed results, but the ability of the intellectual class to market success stories through its propaganda machine in order to justify the long-term preservation and expansion of neoliberal principles across the world gave birth to the Asian miracle.[11] Foreign direct investment and the “inflow of speculative money” would be the driving force behind the miracle, as capitalists in the industrial world shifted their production and manufacturing operations to newly unregulated regions of the world while at the same time taking advantage of the liberalization of capital accounts, escaping the already fragile regulatory systems in their own nation states, and setting the tone for the initial stages of accelerated “neoliberal globalization.”[12] Once the “speculative bubble…popped” foreign investors quickly pulled their money from the region, decreasing confidence in the East Asian region.[13] The neoliberal experiment had revealed the need for regulatory systems in order to impede the emergence of new unregulated speculative markets across the world under a more interdependent global market system, but the reshuffling of capital back into the industrial economies allowed the neoliberal propaganda system to quickly market the success of Free Trade zones.

Crisis 1997 Rambarran misses the opportunity to explain the historical developments that took place between the Asian crisis of 1997 and the 2008 Global Financial Crisis that pushed neoliberalism further into the collective subconscious. Discussions about the emergence of the Canada-United States Free Trade Agreement, the North American Free Trade Agreement, and the consolidation of the European Union would have allowed the author an opportunity to illustrate how neoliberal intellectuals engineered and marketed to their constituents the illusion of a globalized economy for the sake of the consumer and the domestic worker.

The author’s lack of historical evidence makes his argument less convincing. The 1997 and 2008 crises help illustrate how neoliberal forces are able to perpetuate their principles even after severe global economic, political, and social damage, but he is not able to explain how the intellectual forces within his “macroscopic trinity” were able to create the social cultural construction that turned neoliberalism into an unquestionable economic political philosophy.

For example how neoliberal economists such as Milton Friedman and Lauchlin Currie together with multilateral organizations engineered the expansion of neoliberalism to markets across the world. How marketing and public relations intellectuals such as Philip Kotler and Daniel Edelman perfected the use of mass media in order translate the principles of neoliberalism to consumers, distancing them from their role as constituents and shifting their agency toward the world of consumption. How the roles of politicians and bureaucrats was redefined by Thatcher and Reagan in order to reinvent the democratic relationship between representative and constituent, and how the educational system at all levels was reengineered in order to replicate and export neoliberal ideals across the world.

A more detailed explanation of the concepts behind his “social trinity” would have clarified the dynamics between the intellectual class, and political, economic, and social actors. Why is there a one-way communication dynamic between economic actors and society? Why is the communication between political and economic actors a one-way dynamic? And why is the intellectual class not present within the political, economic, and social realms but separate from them? I would argue that the success of the expansion of neoliberal thought is that they now represent government, economic policy, and the collective social conscience. It is why it is more prevalent then ever before to see private sector representatives running for office, managing government institutions, and redefining the nature of once sacred social institutions such as universities. It is not a phenomenon of the industrial world but a common trend across the global system.

References

Duménil, G. & Levy, D. “Neoliberal (Counter) Revolution.” In D. Johnston & A. Saad-Filho, Neoliberalism: A Critical Reader. London: Pluto Press, 2004, pp. 9-19.

Harvey, D. A Brief History of Neoliberalism. London, United Kingdom: Oxford University Press, 2007.

Rambarran,R. “Crisis without End: Neoliberalism in a Globalized Environment Modeling the Historic Rise of Neoliberalism and its Systematic Role in Recent Economic Downturns,” Munich Personal RePEc Archive, October 22, 2015.

Palley, T. I. “From Keynesianism to Neoliberalism: Shifting Paradigms in Economics.” In D. Johnston & A. Saad-Filho, Neoliberalism: A Critical Reader. London: Pluto Press, 2004, pp. 20-29.

Picketty, T. Capitalism in the Twenty-First Century. Cambridge MA: Harvard University Press, 2014.

[1] Rambarran, “Crisis without End”, p. 1.

[2] Ibid.

[3] Ibid.

[4] For more information see Harvey 2007, Palley 2004 and Dumeril & Levy 2004.

[5] Rambarran, 2.

[6] Ibid.

[7] Ibid., 3.

[8] Ibid.

[9] Ibid.

[10] Ibid., 4.

[11] Ibid., 10.

[12] Ibid., 11.

[13] Ibid., 13.

The Neoliberal Model is not Sustainable but State Driven Models have not Proven to be Any Better: How About We Just Redistribute the Wealth?

State Versus Market in Developing Countries in the Twenty First Century

by Kalim Siddiqui (University of Huddersfield)(k.u.siddiqui@hud.ac.uk)

Abstract:
This paper analyses the issue of the state versus the market in developing countries. There was wide ranging debate in the 1950s and 1960s about the role of the state in their economy when these countries attained independence, with developing their economies and eradicating poverty and backwardness being seen as their key priority. In the post-World War II period, the all-pervasive ‘laissez-faire’ model of development was rejected, because during the pre-war period such policies had failed to resolve the economic crisis. Therefore, Keynesian interventionist economic policies were adopted in most of these countries.

The economic crisis in developing countries during the 1980s and 1990s provided an opportunity for international financial institutions to impose ‘Structural Adjustment Programmes’ in the name of aid, which has proved to be disastrous. More than two decades of pursuing neoliberal policies has reduced the progressive aspects of the state sector. The on-going crisis in terms of high unemployment, poverty and inequality provides an opportunity to critically reflect on past performance and on the desirability of reviving the role of the state sector in a way that will contribute to human development.

URL: http://econpapers.repec.org/paper/peswpaper/2015_3ano96.htm

Revised by: Stefano Tijerina (University of Maine)

This paper was distributed by NEP-HIS on 2015-04-19. In it Kalim Siddiqui indicates that the global economic crisis that began in 2007 “provides an opportunity” to reconsider Keynesian interventionist models, thus “reviving the role of the state sector” for purposes of protecting the interests of the majority. Siddiqui centers his argument on the modern economic development experiences of the developing world, juxtaposing it with the experiences of advanced industrialized nations. He particularly emphasizes the economic development experiences of the United States and the United Kingdom, in efforts to advance the argument that Keynesian interventionist policies and protectionist agendas are instrumental in securing a transition into advance industrialization. He argues that the developing world needs to experience a similar transition to that of the UK and the US in order to achieve similar levels industrial competitiveness. However the neoliberal discourse promoted by the industrial powers and the multilateral system after World War Two, and the implementation of neoclassical liberal policies after the 1980s, impeded the developing world from moving in the right direction.

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Siddiqui begins the construction of his argument by providing a brief history of the modern economic development patterns of both the UK and the US. This lays the foundation for his main argument that developing nations should return to the Keynesian patters of economic development in order to achieve advanced levels of industrialization that will eventually allow them to correct present market failures, reducing unemployment, poverty, and environmental degradation.

He points out that in the 1970s and 1980s the UK and US moved away from interventionist policies and adopted a neo-classical model of economic development in response to “corruption, favoritism, and other forms of self-seeking behavior,” that lead to the economic crisis of the times. This model would then be promoted across the international system by the economists of the World Bank and the IMF who found in the same neo-classical model an explanation for the failed Import Substitution Industrialization (ISI) policies implemented across the developing world to cope with the crisis of the 1970s and 1980s.

Kalim Siddiqui

Kalim Siddiqui

What Siddiqui does not address is that the failure of the implementation of the ISI policies across the developing world were the direct result of the same corruption and self-centered tendencies of leadership that forced a move away from interventionist policies in countries like the UK and the US. I agree with Siddiqui that the structural changes introduced by the multilateral financial agencies did more damage than good, however I disagree with his idea that the developing world should return once again to Keynesian solutions, since the implementation of these structural adjustment programs were in fact forms of interventionism that catapulted most of these economies into debt.

Siddiqui then lays down a series of reasons why the role of the state should be reconsidered across the developing world, highlighting that greater interventionism would be more beneficial than an increasing role of the market system. He uses the recent success stories of state driven capitalist experiments such as China’s, Brazil’s, India’s, and Malaysia’s, disregarding the fact that these state driven models continue to be tainted with problems of corruption and self-rewarding management styles that are inefficient and wasteful. For example, he points out the success of Petrobras in Brazil, not following up on the fact that the state-run oil company is now under investigation for high levels of corruption that has sent its stock price in a critical downward spiral.

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At the end Siddiqui’s argument is debunked by more contemporary realities; including decreasing global unemployment patters, economic recovery, and the downfall of state run economies such as those that moved to the Left in Latin America during recent times. Moreover, the bailout policies implemented by the United States and the European Union during the peak of the latest financial crisis contradicts Siddiqui’s argument that neoliberal economies “do not countenance any economic intervention by the state.” I argue that interventionism is an integral part of the advancement of neoliberal agendas; the question that Siddiqqui should be asking is what degree of interventionism is ideal for the developing world under a global neoliberal reality that is inevitable to avoid?

Siddiqui’s work represents yet another criticism to neoliberal capitalism, centering on the agendas set by the administrations of Margaret Thatcher and Ronald Reagan in the 1980s. It does not provide a convincing method or strategy for reviving state driven capitalism under an increasingly intertwined global economic system. It is rich in criticism but short of offering any real solutions through state interventionism. Current case studies that have returned to interventionist models, as in the case of Brazil or India, have failed once again to resolve issues of poverty and income inequality. I agree with the author’s conclusion that the implementation of neoliberal models across the developing world has distorted inequality and social justice even further but disagree with the simplistic solution of increasing state interventionism in the management of market driven economies for the sake of it. More so when the historic evidence indicates that the leadership across the developing world has consistently pursued self-interests and not the interests of the masses. From my point of view, the revival of interventionist models across the developing world will just complete the vicious cycle of history one more time, particularly now that the interests of private global actors has permeated the internal political economy decision making processes of the developing world. If in the early stages of the modern economic development of the developing world foreign political and business interests directly and indirectly penetrated local decision making, thanks in part to the intervention of the World Bank and the IMF as it was pointed out by Siddiqui, then it is inevitable to impede such filtrations under a global system, unless the nation state is willing to pay the high costs of isolationism.

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Siddiqui indicates that self-marginalization from the market system worked for the UK and the US, allowing them to strengthen their internal market and generate the technological and human capital capabilities necessary for advanced industrialization, but that was more than one hundred years ago when the globalization of the market had not reached the levels of sophistication of today. If these industrial powers were to try this same experiment today, the outcome would have been very different. In the past decade developing nations such as Venezuela, Argentina, Bolivia, and Ecuador have experimented with Siddiqui’s model and the results have been no different than the old experiments of Import Substitution Industrialization and other interventionist approaches of the post-Second World War Two era. Corruption, political self-interest, lack of internal will to risk investment capital, lack of infrastructure, lack of an internal sophisticated consumer market, the absence of technology and energy resources, and the inability to generate short-term wealth for redistribute purposes in order to guarantee the long-term projection of the interventionist model has resulted in failed revivals of the Keynesian model. It is the reason why Cuba is now willing to redefine its geopolitical strategy and reestablish relations with the United States; clearly the interventionist model is and was not able to sustain a national economy under a market driven international system.

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The solution lies inside the market system. It is futile to denigrate neoliberalism unless the developing world leadership is willing to construct a parallel market system, as once envisioned by Hugo Chavez, but we are far from that reality. Instead each nation state should reevaluate its wealth distributive and resource allocation policies, moving away from defense spending and refocusing on infrastructure, technology, human capital, health, and the construction of a solid and self-sustainable middle class. Van Parijs’s pivotal work, Real Freedom for All speaks to this idea, indicating that the solution to securing policies that center on what Siddiqui calls the majority, lies in capitalism and not in socialism. If, through a more equal distribution of capital across all sectors of society, capitalism is able to outperform any socialist or interventionist model, then there is no need to attack capitalism and its neoliberal ideas. A replication of this model across the developing world would boost economies into a more sophisticated level of economic development. More competition among states’ private sectors would lead to a more efficient international system, a dynamic that would be enhanced even further by less and not more government intervention. However, the current realities pointed out by Siddiqui indicate that political and corporate elites are not willing to redefine their views on capitalism and therefore we need greater government intervention for redistribute purposes. The redistribution of the pie is the only way to avoid Marx’s inevitable revolution, I agree with Siddiqui. But I do not trust the role of the state as a redistributive agent. I am more in favor of what Michael Howard calls “basic income capitalism” that secures sustainable expendable income in the hands of all consumers through the market system. The dilemma of interventionism continues to be at the forefront, yet it could easily be resolved by the market itself, as long as the actors, workers and owners of capital, are willing to redefine the outreach and potential of capitalism; as long as the social construction of freedom of capital is redefined?

References

Michael W. Howard, “Exploitation, Labor, and Basic Income.” University of Maine (work in progress).

Kalim Siddiqui, “State Versus Market in Developing Countries in the Twenty First Century,” Institute of Economic Research (working paper), submitted at VIII International Conference on Applied Economics, Poland, June 2015, p.1.

Van Parijs, P. Real Freedom for All: What (If Anything) Could Justify Capitalism. Oxford: Oxford University Press, 2005.

An International Comparison of #Inherited #Wealth (#OldEurope vs the #USA)

Inherited Wealth over the Path of Development: Sweden, 1810–2010

by Henry Ohlsson (henry.ohlsson@riksbank.se), Jesper Roine (jesper.roine@hhs.se) and Daniel Waldenström (daniel.waldenstrom@nek.uu.se)

Abstract: Inherited wealth has attracted much attention recently, much due to the research by Thomas Piketty (Piketty, 2011; 2014). The discussion has mainly revolved around a long-run contrast between Europe and the U.S., even though data on explicit historical inheritance flows are only really available for France and to some extent for the U.K. We study the long-run evolution of inherited wealth in Sweden over the past two hundred years. The trends in Sweden are similar to those in France and the U.K: beginning at a high level in the nineteenth century, falling sharply in the interwar era and staying low thereafter, but tending to increase in recent years. The levels, however, differ greatly. The Swedish flows were only half of those in France and the U.K. before 1900 and also much lower after 1980. The main reason for the low levels in the nineteenth century is that the capital-income ratio is much lower than in “Old Europe”. In fact, the Swedish capital-income ratio was similar to that in the U.S., but the savings and growth rates were much lower in Sweden than in the U.S. Rapid income growth following industrialization and increasing savings rates were also important factors behind the development of the capital-income ratio and the inheritance flow during the twentieth century. The recent differences in inheritance flows have several potential explanations related to the Swedish welfare state and pension system. Sweden was “un-European” during the nineteenth century because the country was so poor, Sweden is “un-European” today because so much wealth formation has taken place within the welfare state and the occupational pension systems.

URL http://econpapers.repec.org/paper/hhsuulswp/2014_5f007.htm.

Review by Guido Alfani (Bocconi University, Milan)

Summary

The paper by Ohlsson, Roine and Waldenström was distributed by NEP-HIS on 2014-08-25. It provides annual estimates of inheritance flows and of the share of inherited wealth over total wealth for Sweden covering fully two centuries, from 1810 to 2010. In this period, Sweden changed deeply: originally a relatively poor and mostly agrarian country, by the 1970s it was one of the wealthiest areas of the world. It also became known for its particularly extensive welfare state.

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Building upon earlier research conducted by Roine and Waldenström on wealth concentration and on the wealth-income ratio in Sweden, the paper points out a striking difference between such country and other European areas: while in nineteenth-century France and U.K. the wealth-income ratio was in the 600-700 percent range, in Sweden it stayed within the 300-500 percent range until the early twentieth century. These values are similar to those characterizing the U.S., and the authors argue that they go hand in hand with the limited importance of inheritance flows in nineteenth century Sweden and the U.S. compared to France and the U.K. In both Sweden and the U.S., limited historical accumulation of wealth explains initial low wealth-income ratios.

However, the similarities stop here as the authors describe the first as a poor country characterized by sustained out-migration, and the second as a “land of opportunity”. By 1950, in all the four countries wealth-income ratios had converged to low levels (generally speaking, in the 200-400 percent range, with Sweden even falling below 200 in the 1970s). In recent decades, all four countries experienced a tendency to the increase in the wealth-income ratio. In Sweden, however, the increase has been smaller and what is more, it has resulted into an only minimal increase in inheritance flows.

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The core of the paper consists in an attempt to reconstruct the long-term evolution of inherited wealth (b), which is shown to have been around 11 percent of the national income throughout the nineteenth century (half the figure for France and the U.K.), later dropping to just 5 percent around 1970. Following Piketty’s approach, the authors decompose the inheritance flow into its determinants which comprise, apart from the wealth-income ratio (β), the ratio of the average wealth at death to the average wealth of the living (μ) and the mortality rate (m). This can be described with a simple formula:

b= β·μ·m

The reason why we are interested in the share of inherited wealth is that, according to what Piketty (2014) suggests, if the share of inherited wealth is too high then it may result incompatible with the principles of meritocracy and social justice which characterize modern democracies. The authors find that in Sweden, in the long run the wealth-income ratio was the main driver of changes in the share of inherited wealth (in its turn, the wealth-income ratio was influenced by changes in private savings and by fluctuations in the growth rate). However in recent decades, an increase in the wealth-income ratio has only partially translated into an increase in the share of inherited wealth, essentially due to a decline in the ratio of the average wealth at death to the average wealth of the living. The authors provide two possible explanations for this: the fact that new wealth was accumulated among the relatively young, or the retirement savings pattern which, in comparison to France and the U.K., would lead the Swedish to be keener on decumulating private wealth.

Comment

Ohlsson, Roine and Waldenström provide a novel perspective on an old story – how Sweden became an exceptionally “egalitarian” Western society – by making excellent use of the analytical tools produced by the recent wave of research on long-term changes in inequality. They provide many interesting and useful insights into two centuries of Swedish history, although sometimes more detail would be useful. For example the statement, that maybe the recent increases in the wealth-income ratio translated only partially into an increase in the share of inherited wealth because new wealth was accumulated mainly by the relatively young, would probably require more supporting evidence.

Particularly interesting is the analysis of the role played by the public in transferring wealth inter-generationally, by means of an exceptionally generous welfare state which basically replaces part of the private inheritance (and influences the pattern of private savings). Perhaps this aspect would have been worthy of further discussion, clarifying for the international reader how such welfare state system came into being, but also pointing out at possible cultural differences between the Swedish and others which might explain a preference for both a more developed welfare state, and lesser wealth (and income) inequality in general. Instead, Ohlsson and colleagues simply suggest that Sweden was «un-European» essentially because «old wealth was not as important in Sweden as it was in France and the U.K. in the 1800s», this in turn being due to the fact that «Swedes were so poor that they simply needed to eat almost all their income in the pre-1900 era» (pp. 21-22). But, looked at from the view point of continental Europe, Sweden has many other peculiarities which might be relevant in explaining the dynamics that the authors so convincingly reconstruct. This being said, the paper is clearly an important contribution to current debates on long-term changes in inheritance and inequality, pointing out many aspects which would well be worthy of more international research.

References and Suggested Further Reading

Alafani, G. (2014) “Economic Inequality in Northwestern Italy: A Long-Term View (Fourteenth to Eighteenth centuries)”, Dondena Working Paper, n. 61, March 2014.

Atkinson, A.B. (2012) “Wealth and Inheritance in Britain from 1896 to the Present”, Working Paper, Oxford University.

Lindert, P.H. (1991) “Toward a Comparative History of Income and Wealth Inequality”, in Y.S. Brenner, H. Kaelble, M. Thomas (eds.), Income Distribution in Historical Perspective (Cambridge: Cambridge University Press), pp. 212-231.

Piketty, T. (2014) Capital in the Twenty-First Century (Cambridge, MA: Harvard University Press).

Piketty, T., G. Postel-Vinay, and J-L Rosenthal (2006) “Wealth Concentration in a Developing Economy: Paris and France, 1807-1994”, American Economic Review, 96(1): 236-256.

Piketty, T. and Zucman, G. (forthcoming 2014), “Capital is Back: Wealth-Income Ratios in Rich Countries 1700-2010”, Quarterly Journal of Economics 129(3).

Roine, J. and D. Waldenström (2009), “Wealth Concentration over the Path of Development: Sweden, 1873-2006”, Scandinavian Journal of Economics , 111(1): 151-187.